Assignment II: Merton Truck Company

Case Study Work by: Nagaraj NB,

I.

SITUATIONAL ANALYSIS
Case Introduction
In the case, the company's president expressed dissatisfaction with
Merton's financial performance during the six-month period January-June
1988. He said "I know we are operating at capacity in some of our
production lines, But surely we can do something to improve our financial
position.
Further he suggested Maybe we should change our product mix. We don't
seem to be making a profit on our Model 101 truck. Why don't we just
stop making it altogether? Maybe we should purchase engines from an
outside supplier, relieving the capacity problem in our engine assembly
department.
He instructed the Merton's controller and sales and production managers,
that Why don't the three of you get together, consider the different
options, and co, me up with a recommendation?"
Current Situation
1. Specialized models of trucks: Model 101 & Model 102
2. Departments and Capacities
i. Engine Assembly
- 100%
ii.
Metal Stamping
- 83.3%
iii.
Model 101 Assembly - 40%
iv.
Model 102 Assembly - 100%
3. Total machine hours available - 4000
4. They can sell the complete produce
5. Current monthly output:
i. Model 101
- 1000 units
ii.
Model 102
- 1500 units
Problem Statement
Merton Truck Company was unable to find the best product mix for
maximizing of profit while keeping optimal capacity utilization for the four
manufacturing departments i.e. engine assembly, metal stamping, Model
101 assembly, and Model 102 assembly

II.

METHODOLOGY
In order to decide whether we have to continue or stop the production of
any model first of all we need to calculate the contribution from each
models.
Hence, with the data provided in the Table A, B and C of the case the
following calculations are done.
Specification
Model 101
Model 102
A. Direct Material
24000
20000
Direct Labour
Engine Assembly
1200
2400
Metal Stamping
800
600
Final Assembly
2000
1500
B. Total Direct Labour
4000
4500
Variable Overhead
Engine Assembly
2100
4000
Metal Stamping
2400
2000
Final Assembly
3500
2500
C. Total Variable Overhead
8000
8500
Selling Prices
39000
38000
Total Cost (A+B+C)
36000
33000
Contribution Margin per unit
3000
5000
After calculating the contribution these figures were taken as the
coefficient of objective function along with defining the case constraints
and Solver was executed to determine the optimal production quantity as
below:
MERTON TRUCK COMPANY

Model 101
(X)
Model 101
(Y)

Decisi
on
Variab
le

Objectiv
e
Functio
n

2000

3000

1000

5000

24000
00

4000

Engine
Assemb
ly

Metal
Stamp
ing

Model
X
Assem
bly

Model
Y
Assem
bly

6000
4000
3000
<=
<=
<=
<=
4000
6000
5000
4500

Sensitivity Analysis has been performed which give us the idea of shadow price, AI, AD, Bin
Non-binding constraints as below:
Variable Cells
Final

Reduced

Objecti

Allowa

Cell
$B$3
$B$4
Constraints

Name
Model 101 (X) Decision
Variable
Model 101 (Y) Decision
Variable

Value

Cell

Name
Engine Assembly
Metal Stamping
Model X Assembly
Model Y Assembly

ble
Increas
e

2000

3000

2000

1000

5000

1000

Final

$D$5
$E$5
$F$5
$G$5

Cost

ve
Coeffici
ent

Value
4000
6000
4000
3000

Shadow
Price
2000
500
0
0

Similar Methodology was adopted in solving various case Question

Constra Allowa
int
ble
R.H.
Increas
Side
e
4000
500
6000
500
5000
1E+30
4500
1E+30

III.

INFERENCES
As per the analysis
1. Engine assembly facility is completely utilized (binding constraint)
and further unit increase in engine assemble machine hours will
result in $2000 increase in contribution.
2. Metal Stamping facility is completely utilized (binding constraint)
and further Unit increase in Metal Stamping machine hours will
result in $500 increase in contribution
3. Model 101 and Model102 assembly shop is underutilized (nonbinding constraint)
4. Both the models are required to be produced to maximize the
contribution (decision variables are basic variables)
5. Contribution is maximized with 2000 units of Model 101 and 1000
units of Model 102.

IV.

ANSWERS TO CASE QUESTIONS:

A) Best product mix is 2000 trucks of Model 101 & 1000 trucks of Model 102
B) Best product mix is 1999 trucks of Model 101 & 1001 trucks of Model 102. The extra unit of Engine Assembly
Capacity is worth $2000/-

Decisio
n
Variabl
e
Model 101
(X)
Model 101
(Y)

Engine
Assembl
y

Objective Function

Metal
Stamping

Model X
Assembly

Model Y
Assembly

1999

3000

1001

5000

2402000

4000
<=

6000
<=

4001

4000
<=

3000
<=

6000

5000

4500

Reduced

Objective

Allowable

Allowable

Cost

Coefficient

Increase

Decrease

Variable
Cells

Cell
$B$3
$B$4

Name
Model 101 (X) Decision
Variable
Model 101 (Y) Decision
Variable

Final
Valu
e
1999

3000

2000

500

1001

5000

1000

2000

Constrai
nts

Cell
$D$5

Name
Engine Assembly

Final
Valu
e
4001

Shadow
Price
2000

Constraint
R.H. Side
4001

Allowable
Increase
499

Allowable
Decrease
501

$E$5
$F$5
$G$5

Metal Stamping
Model X Assembly
Model Y Assembly

6000
3998
3003

500
0
0

6000
5000
4500

501
1E+30
1E+30

998
1002
1497

C) Best product mix is 1900 trucks of Model 101 & 1100 trucks of Model 102. The profit would be $2600000/D) 500 units (Allowable increase for engine
assembly)
2) The company may adopt the renting alternative for maximum of 500 Engine Assembly hours which has contribution
of $1000 per hour. Hence max rent it can pay <= 2000*500 <=1000000/3)
Decisio
n
Engine
Variabl
Assembl
Metal
Model X
Model Y
e
Objective Function
y
Stamping Assembly
Assembly
Model 101 (X)
2000
3000
1
2
2
0
Model 103 (Y)
1000
5000
2
2
0
3
Model 101 (Z)
0
2000
0.8
1.5
1
0

2400000

4000
<=

6000
<=

4000

4000
<=

6000

3000
<=

5000

4500

Variable
Cells

Cell
$B$3
$B$4
$B$5

Name
Model 101 (X) Decision
Variable
Model 103 (Y) Decision
Variable
Model 101 (Z) Decision
Variable

Final
Valu
e

Reduced

Objective

Allowable

Allowable

Cost

Coefficient

Increase

Decrease

2000

3000

2000

500

1000

5000

1000

2000

-350

2000

350

1E+30

Constraint
s

Cell
$D$6
$E$6
$F$6
$G$6

3 A)
3 B)

4)

Name
Engine Assembly
Metal Stamping
Model X Assembly
Model Y Assembly

Final
Valu
e
4000
6000
4000
3000

Shadow
Price
2000
500
0
0

Constraint
R.H. Side
4000
6000
5000
4500

Allowable
Increase
500
500
1E+30
1E+30

Allowable
Decrease
500
1000
1000
1500

No Merton should not produce

Model 103 trucks
The contribution from Model 103 truck should be >= (2000-(-350)) >=2350 for
considering it worth to produce
From the senstivity analysis it is known that allowable increase in the engine assembly capacity is 500. Addition more
than this will not make any improvement, hence it is not recommended with this soultion.
Now reworking the entire problem for
better analysis:
Direct Labor for Model 101 cost $ 1200 for normal working and $
1800 for Over time
Direct Labor for Model 102 cost $ 2400 for normal working and $
3600 for Over time
This results in reduced contribution i.e. $2400/- for Model 101 and $3800 for Model 102. Also Fixed cost is increased
by $ 0.75 Million
Reworkin
g this
Decisio
n
Objective
Engine
Metal
Model X
Model Y
Variable Function
Assembly Stamping
Assembly
Assembly
Engine Assembly OT

Model 101
(X)
Model 103

1500
1250

3000
5000

1
2

2
2

2
0

0
3

0
0

(Y)
Model 101
(X') OT
Model 102
(X') OT

2400

250

3800

2350000

4000

6000

4000

3000

<=

<=
4000

<=
6000

<=
5000

<=
4500

2000

Microsoft Excel 14.0 Sensitivity Report

Worksheet: [Merton Truck
Company.xlsx]MC (5)
Report Created: 9/28/2015 1:16:35 PM
Variable
Cells
Final
Cell
Name
Value
Model 101 (X)
$B$3
Decision Variable
1500
Model 103 (Y)
$B$4
Decision Variable
1250
Model 101 (X') OT
$B$5
Decision Variable
0
Model 102 (X') OT
$B$6
Decision Variable
250

Reduced
Cost

Objective
Coefficient

Allowable
Increase

Allowable
Decrease

3000

1400

5000

1200

2400

1E+30

3800

1200

Constraint
R.H. Side
4000
6000
5000

Allowable
Increase
500
2000
1E+30

4500

Shadow
Price
600
1200
0
466.66666
67

4500

4500

1500

500

2000

1E+30

1500

Constraint
s
Cell
$D$7
$E$7
$F$7

Name
Engine Assembly
Metal Stamping
Model X Assembly

$G$7

Model Y Assembly
Engine Assembly
OT

$H$7

Final
Value
4000
6000
3000

If Over time is considered, the contribution is getting reduced by 50000 i.e. from $
2400000/- to $ 2350000/- so better to avoid it.

Allowable
Decrease
1500
1000
2000

Question 5
This requires us to add new constraint to the product mix
Model 101 (X)
Model 102 (Y)

-1
3

<= 0
Solving after the adding the new constraint shows the below result which indicates that new product mix is
2250 for model 101 and 750 for model 102. The new contribution is 1900000
MERTON TRUCK COMPANY
Decisi
on
Varia
ble
Model 101
(X)
Model 102
(Y)

Objecti
ve
Functio
n

Metal
Stamping

Model X
Assembly

Model Y
Assembly

Production Ratio
Constraint

2250

3000

-1

750

5000

19000
00
Variable Cells
Cel
l
Name
$B$ Model 101 (X) Decision
3
Variable
$B$ Model 102 (Y) Decision
4
Variable
Constraints
Cell

Engine
Assem
bly

Name

3750
<=
<=
4000
Final
Value

6000

4500
<=

2250
<=

6000

5000

Reduced
Cost

0
<=

4500

Objective
Coefficient

Allowable
Increase

Allowable
Decrease

2250

3000

2000

4666.666667

750

5000

1E+30

2000

Final

Shadow

Constraint R.H.

Allowable

Allowable

Value
$D$
5
$E$
5
$F$
5
$G$
5
$H$
5

Price

Side

Increase

Decrease

Engine Assembly

3750

4000

1E+30

250

Metal Stamping

6000

1750

6000

400

6000

Model X Assembly

4500

5000

1E+30

500

Model Y Assembly

2250

4500

1E+30

2250

500

1000

1000

Production Ratio Constraint